Thomas White Global Investing
China
China Stamp
March 16, 2012
A Postcard from the Asia Pacific
China: Migrant workers heading home

A picture of concentration

The new labor migration patterns reflect a new stage of evolution of the Chinese economy.

During the Cultural Revolution of the 1960s, a failed socio-political movement intended to transform the country, Chinese leader Mao Zedong is said to have asked urban youth to return to farming villages to gain knowledge about methods of cultivation. Some four decades and more later, his clarion call seems to have found an uncanny resonance with millions of Chinese factory workers toiling away hundreds of miles away from their home towns for a living.

It all started in May 2010 when Taiwanese electronics contract manufacturer Foxconn, which employs about 800,000 Chinese laborers, was subject to a scathing attack by the international media. The Financial Times reported a number of suicides at its south China factory, turning the international spotlight on the working conditions in Chinese factories. But more than the actual event, the reactions hogged the news headlines. The company, whose customers included the likes of HP, Dell, and Apple, immediately announced a 30% increase in wages.

But there was an unexpected result of this phenomenal rise in workers’ salaries. Factories located mostly in relatively costlier locations like the coastal provinces, slowly started moving production to China’s interior provinces where labor costs were relatively low. An Economist article noted that the exodus of migrant workers back to their home towns, surprisingly, had the blessings of government officials, who were only too happy to shoo them away earlier.

Aside from the emotional tug of workers being separated from their families, practical economics played an important role in this case. Though the wages were higher in coastal provinces such as Guangdong, the cost of living there was equally high. So, it made sound sense for these workers to head home even if the pay was a tad lower. A Financial Times report said poorer interior locales such as Hubei, Jiangxi, and Anhui, which were the main suppliers of migrant workers, have now become home to the factories themselves.

The Foxconn episode was a watershed event in many other ways as well. Chinese labor, which had a global reputation for being dirt-cheap, would lose that status sooner or later, thanks to the new wage standards set by one of the largest private employers in China. It also ignited a debate over the continuance of the factory-town system that provided the impetus for 30 years of economic growth in China, a Financial Times report said. ‘The Foxconn effect,’ as it has been termed by the FT, would also likely lead to a sort of rebalancing in the economy as the higher wages would naturally push up the prices of finished goods for U.S. and European consumers, but would simultaneously increase the purchasing power of Chinese workers.

If workers move home in droves, can companies be far behind? The answer to this rhetorical question lies in the fact that many companies, including Foxconn itself as well as firms such as Compal and Quanta, have established factories in inland Chinese provinces such as Sichuan and Henan over the past two years. The interesting fact is that both parties stand to benefit from the arrangement as laborers enjoy the low cost of living, while companies are able to hire workers at affordable wages. As more and more companies move to the interior towns of China, the country’s laborers will have more jobs to choose from closer to home and will avoid slogging it out in far-flung sweatshops. And along with factories also come the attendant infrastructure development projects such as express highways and bridges necessary to transport goods to the nearest ports.

Many of the workers who have gone home to be with their families for the Chinese Spring Festival are likely to stay on, given the new-found opportunities. As the Chinese lunar New Year kicks in, which also happens to be the prime job-hopping season in the country, global corporations will be keeping a close watch on this reverse migration of laborers with their fingers crossed.

Image Credit: Steve Jurvetson on Flickr under a Creative Commons License

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